LCHD 8-K/A
Leader Capital Holdings Corp. (LCHD)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 17, 2020
LEADER CAPITAL HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
| Nevada | 000-56159 | 37- 1853394 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| Room
2708-09, Metropolis Tower, 10 Metropolis Drive, Hung Hom, Hong Kong |
||
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: +852 3487 6378
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| [ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425). |
| [ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12). |
| [ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)). |
| [ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)). |
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Explanatory Note
On August 21, 2020, Leader Capital Holdings Corp., a Nevada corporation (the “Company”), filed a Current Report on Form 8-K (the “Original Form 8-K”) to report, among other things, that on August 17, 2020, it had acquired, through its wholly-owned subsidiary JFB Internet Service Limited (the “Buyer”), all of the issued and outstanding capital stock of Nice Products Inc., a company organized under the laws of the British Virgin Islands (“NPI”) (such transaction, the “Acquisition”).
This Form 8-K/A amends the Original Form 8-K to include the historical audited and unaudited financial statements of NPI and the pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Original Form 8-K in reliance on the instructions to such items. In addition, this Form 8-K/A amends the Original Form 8-K to reflect that the net purchase price for the Acquisition was $3,506,042 instead of $3,366,044.
Except as provided above, the disclosure included in the Original Form 8-K otherwise remains unchanged.
Item 1.01 Entry into a Material Definitive Agreement.
As previously disclosed in the Original Form 8-K, on August 17, 2020, the Company acquired, through the Buyer, NPI pursuant to the terms and conditions of that certain Stock Purchase Agreement, dated as of August 17, 2020 (the “Purchase Agreement”), among the Company, the Buyer, NPI, the selling shareholders of NPI identified therein (each a “Seller,” and, collectively, the “Sellers”) and the representative of the Sellers identified therein.
The aggregate purchase price for the Acquisition was $4,850,000, less certain discounts, expenses and reductions for outstanding NPI debt owed to the Company and/or its affiliates. After the Company’s further review, it was determined that the net purchase price for the Acquisition was $3,506,042, payable in 8,415,111 shares of the Company’s common stock to the Sellers in accordance with their respective pro rata percentage.
Item 2.01 Completion of Acquisition or Disposition of Assets.
To the extent required by this Item 2.01, the information included at Item 1.01 above is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
(i) The audited consolidated financial statements of NPI for the fiscal years ended August 31, 2019 and August 31, 2018, including the accompanying notes thereto and the report of the independent auditor, are attached hereto as Exhibit 99.1 and are incorporated by reference herein.
(ii) The unaudited condensed consolidated financial statements of NPI as of and for the nine and three months ended May 31, 2020 and as of August 31, 2019, including the accompanying notes thereto, are attached hereto as Exhibit 99.2 and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial statements of the Company and NPI for the year ended August 31, 2019 and for the nine months ended May 31, 2020 are attached hereto as Exhibit 99.3 and are incorporated by reference herein.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| LEADER CAPITAL HOLDINGS CORP. | ||
| Date: November 16, 2020 | By: | /s/ Yi-Hsiu Lin |
Yi-Hsiu Lin Chief Executive Officer | ||
Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND EXHIBITS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nice Products Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nice Products Inc. and its subsidiaries (the “Company”) as of August 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended August 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019, and the results of its operations and its cash flows for each of the two years in the period ended August 31, 2019, in conformity with accounting principles generally accepted in the United States.
Going Concern Matter
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred losses resulting in an accumulated deficit as of August 31, 2019, and the Company currently has net working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Centurion ZD CPA & Co. | |
| Centurion ZD CPA & Co. | |
| We have served as the Company’s auditor since 2019 | |
| Hong Kong, China | |
| November 16, 2020 |
| F-2 |
CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 2019 AND 2018
(In U.S. dollars except share and per share data)
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 209,679 | $ | 7,822 | ||||
| Accounts receivable | - | 129,870 | ||||||
| Prepayments, deposits and other receivables | 116,629 | - | ||||||
| Due from a shareholder | - | 58,805 | ||||||
| Due from a director | 723 | - | ||||||
| Total current assets | 327,031 | 196,497 | ||||||
| Non-marketable equity securities | 446,999 | - | ||||||
| Plant and equipment, net | 27,202 | 31,220 | ||||||
| TOTAL ASSETS | $ | 801,232 | $ | 227,717 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accrued expenses and other payables | 127,602 | 40,752 | ||||||
| Contract liabilities | 14,317 | 7,549 | ||||||
| Loans payable, current | 871,794 | 89,577 | ||||||
| Due to a shareholder | 484,534 | - | ||||||
| Tax payables | 14,358 | 7,219 | ||||||
| Total current liabilities | 1,512,605 | 145,097 | ||||||
| Loans payable, non-current | - | 67,182 | ||||||
| Total non-current liabilities | - | 67,182 | ||||||
| TOTAL LIABILITIES | $ | 1,512,605 | $ | 212,279 | ||||
| COMMITMENTS AND CONTINGENCIES (Note 11) | ||||||||
| STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Issued share capital | 3,500,000 | 197,203 | ||||||
| Stock subscriptions receivable | (3,500,000 | ) | - | |||||
| Additional paid-in capital | 197,203 | - | ||||||
| Accumulated other comprehensive income (loss) | 15,892 | (366 | ) | |||||
| Accumulated deficits | (924,468 | ) | (181,399 | ) | ||||
| TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY | $ | (711,373 | ) | $ | 15,438 | |||
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | 801,232 | $ | 227,717 | ||||
See accompanying notes to the consolidated financial statements.
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED AUGUST 31, 2019 AND 2018
(In U.S. dollars)
| Year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| REVENUE | $ | 516,304 | $ | 397,354 | ||||
| Cost of services provided | (25,249 | ) | (3 | ) | ||||
| Sales and marketing expenses | (118,511 | ) | (154 | ) | ||||
| General and administrative | (1,106,841 | ) | (491,414 | ) | ||||
| LOSS FROM OPERATIONS | (734,297 | ) | (94,217 | ) | ||||
| Interest expenses | (21,883 | ) | (2,892 | ) | ||||
| Other income | 13,137 | 5,745 | ||||||
| LOSS BEFORE INCOME TAX | (743,043 | ) | (91,364 | ) | ||||
| Income tax expense | (26 | ) | - | |||||
| NET LOSS | $ | (743,069 | ) | $ | (91,364 | ) | ||
| OTHER COMPREHENSIVE INCOME | ||||||||
| Foreign currency transaction gain | 16,258 | 1,629 | ||||||
| COMPREHENSIVE LOSS | $ | (726,811 | ) | $ | (89,735 | ) | ||
See accompanying notes to the consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 2019 AND 2018
(In U.S. dollars except for share data)
| ISSUED SHARE CAPITAL | STOCK SUBSCRIPTIONS RECEIVABLE |
ADDITIONAL PAID-UP CAPITAL | ACCUMULATED OTHER COMPREHENSIVE LOSS |
ACCUMULATED DEFICITS | TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) |
|||||||||||||||||||
| Balance as of September 1, 2017 | $ | 32,350 | $ | - | $ | - | $ | (1,995 | ) | $ | (90,035 | ) | $ | (59,680 | ) | |||||||||
| Issuance of shares | 164,853 | - | - | - | - | 164,853 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 1,629 | - | 1,629 | ||||||||||||||||||
| Net loss | - | - | - | (91,364 | ) | (91,364 | ) | |||||||||||||||||
| Balance as of August 31, 2018 | $ | 197,203 | $ | - | $ | - | $ | (366 | ) | $ | (181,399 | ) | $ | 15,438 | ||||||||||
| Reclassification arising from reorganization (note 1) | (197,203 | ) | - | 197,203 | - | - | - | |||||||||||||||||
| Issuance of shares | 3,500,000 | (3,500,000 | ) | - | - | - | - | |||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 16,258 | - | 16,258 | ||||||||||||||||||
| Net loss | - | - | - | - | (743,069 | ) | (743,069 | ) | ||||||||||||||||
| Balance as of August 31, 2019 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 197,203 | $ | 15,892 | $ | (924,468 | ) | $ | (711,373 | ) | |||||||||
See accompanying notes to the consolidated financial statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
| For the year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (743,069 | ) | $ | (91,364 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 14,066 | 10,562 | ||||||
| Software development income | (430,589 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 128,758 | (133,299 | ) | |||||
| Prepayments, deposits and other receivables | (118,437 | ) | - | |||||
| Advance to a director | (731 | ) | (60,358 | ) | ||||
| Other payables and accrued liabilities | 90,431 | 814 | ||||||
| Contract liabilities | 6,997 | (29,395 | ) | |||||
| Tax payables | (14,101 | ) | 7,441 | |||||
| Net cash used in operating activities | (1,066,675 | ) | (295,599 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | (10,819 | ) | (42,791 | ) | ||||
| Net cash used in investing activities | (10,819 | ) | (42,791 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from share issuance | - | 167,166 | ||||||
Proceeds from loans |
822,492 | 183,883 | ||||||
| Repayment of loan | (88,809 | ) | (22,985 | ) | ||||
| Advance from a shareholder | 545,533 | - | ||||||
| Net cash provided by financing activities | 1,279,216 | 328,064 | ||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | 135 | (132 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 201,857 | (10,458 | ) | |||||
| Cash and cash equivalents, beginning of year | 7,822 | 18,280 | ||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 209,679 | $ | 7,822 | ||||
| SUPPLEMENTAL CASH FLOWS INFORMATION | ||||||||
| Cash paid for income taxes | $ | 26 | $ | - | ||||
| Cash paid for interest | $ | 11,174 | $ | 2,892 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Software development
income received in the form of common shares of LCHD (Note 2) |
$ | 430,589 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
| F-6 |
NICE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the YEARS ended August 31, 2019 and 2018
(In U.S. dollars)
1. TITLE, ORGANIZATION AND REORGANIZATION
Nice Products Inc. (“Nice Products” or “NPI” or the “Company”) was incorporated in the British Virgin Islands on December 17, 2018.
The Company, through its subsidiaries, mainly engages in the development of ecological-systems applications, integration of big data and promotion of OTT applications.
| Company name | Place/date of incorporation | Principal activities | |||
| 1. | LOC Weibo Co., Ltd. (“LOC”) | Republic of China / September 29, 2017 | Development of ecological-systems applications, integration of big data and promotion of OTT applications | ||
| 2. | Beijing DataComm Cloud Media Technology Co., Ltd. (“BJDC”) | People’s Republic of China / April 16, 2013 | Development of ecological-systems applications, integration of big data and promotion of OTT applications | ||
The formation of Nice Products Inc. was completed in December 2018. The share capital of the Company is $3,500,000 divided into 50,000 shares of $70 par value each. On December 17, 2018, the Company issued an aggregate of 50,000 shares to five investors. The Company is owned and controlled by the same control group as LOC and BJDC. On July 19, 2019 and March 1, 2019, the beneficial shareholders of LOC and BJDC exchanged 100% of their shareholding of LOC and BJDC for the shares of the Company (the “Share Exchange”) respectively. The Share Exchange has been accounted for as a common control transaction. Other than its 100% ownership of LOC and BJDC, Nice Products has no significant assets and no other business operations.
These consolidated financial statements have been titled “Nice Products Inc.” because:
| 1. | Nice Products Inc. is the holding company of LOC and BJDC, and the operations of the Company. |
| 2. | Other than its 100% ownership of LOC and BJDC, Nice Products Inc. has no significant assets and no other business operations. |
Nice Products Inc. and its subsidiaries are hereinafter referred to as the “Company”.
Organization and reorganization
LOC was incorporated in Republic of China on September 29, 2017 as a company with limited liability. Upon incorporation, LOC issued 500,000 ordinary shares to five individuals who held the shares on behalf of the shareholders of Nice Products at New Taiwanese dollars (“NT$”) 10 each.
BJDC was incorporated in the People’s Republic of China (the “PRC”) as a company with limited liability on April 16, 2013. Upon incorporation, BJDC issued 200,000 ordinary shares (at $32,350) to an individual. Under a trust agreement, BJDC was set up by an individual on behalf of the shareholders of Nice Products.
The acquisition of LOC and BJDC by Nice Products has been accounted for as common control transactions in a manner similar to a pooling of interests and there was no recognition of any goodwill or excess of the acquirers’ interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combinations. Therefore, these transactions were recorded at historical cost with a reclassification of equity from retained profits to additional paid in capital to reflect the deemed value of consideration given in the local jurisdiction and the capital structure of LOC and BJDC. The consolidated financial statements of the Company include all of the accounts of the Company and its subsidiaries, LOC and BJDC for all periods presented. All material intercompany transactions and balances have been eliminated in the consolidation.
On August 17, 2020, Leader Capital Holdings Corp. (“LCHD”) entered into a share purchase agreement (the “Purchase Agreement”) with the Company to acquire all the issued and outstanding shares of the Company. Under the terms of the Purchase Agreement, LCHD agreed to issue 8,415,111 shares of its common stock to the owners of the Company.
On August 21, 2020, LCHD filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) announcing the completion of a business combination between LCHD and NPI in accordance with the terms of the Purchase Agreement. As a result of the transaction, NPI became a wholly-owned subsidiary of LCHD and the shareholders of NPI became the holders of approximately 6.49 % of LCHD’s issued and outstanding capital stock on a fully-diluted basis.
| F-7 |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the financial statements of Nice Products Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company has adopted August 31 as its fiscal year end.
Basis of preparation
The consolidated financial statements have been prepared under the historical cost convention.
Going concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The Company has suffered recurring losses from operations, and records an accumulated deficit and a working capital deficit of $924,468 and $1,185,574, respectively as of August 31, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due.
The Company expects to finance its operations primarily through cash flows from operations, loans from existing directors and shareholders and placements of capital stock for additional funding. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve its strategic objectives, the shareholders have indicated their intent and ability to provide additional financing. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, workforces, customers, and created significant volatility and disruption of financial markets. It has also disrupted the normal operations of many businesses, including the Company’s businesses. This outbreak could decrease spending, adversely affect demand for the Company’s services and harm its business and results of operations. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on its business or results of operations at this time.
These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as going concern.
Use of estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for the Company’s business, and adversely impact its results of operations. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in its unaudited condensed consolidated financial statements.
| F-8 |
Identified below are the accounting policies that reflect the Company’s most significant estimates and judgments, and those that the Company believes are the most critical to fully understanding and evaluating its consolidated financial statements.
Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
Software development costs
The Company expenses software development costs, including costs to develop software products or the software component of products to be marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.
Revenue recognition
The Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09:
| Step 1: Identify the contract | |
| Step 2: Identify the performance obligations | |
| Step 3: Determine the transaction price | |
| Step 4: Allocate the transaction price | |
| Step 5: Recognize revenue |
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, which may occur at a point in time or over time depending on the terms and conditions of the agreement, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company entered into several agreements with third party customers to assist the customers in the development of their mobile communications software and mobile e-commerce software. LOC also joined forces with Leader Capital Holdings Corp (a company incorporated in Nevada and whose shares are quoted on the OTC Pink Marketplace quotation system maintained by the OTC Markets Group, Inc. under the symbol “LCHD”) in 2019 to launch a Unicorn-class app - FinMaster.
| F-9 |
Income from provision of software development service and maintenance service are recognized when the service is performed.
Revenue by recognition over time vs point in time
| Year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue by recognition over time | $ | 516,304 | $ | 397,354 | ||||
| Revenue by recognition at a point in time | - | - | ||||||
| $ | 516,304 | $ | 397,354 | |||||
On September 1, 2018, LOC was appointed by LCHD to develop a mobile application in four stages for a total consideration of TWD20,000,000 ($651,466), payable in the form of common shares of LCHD. As of August 31, 2019, the first and second stages of development for the basic functions of the mobile application have been completed, and LCHD has issued a total of 908,678 of restricted common shares in aggregate at $0.50 per share for the work completed up to August 31, 2019. The Company has recognized income of $430,589 (NT$13,333,333) for the first and second development stage for the year ended August 31, 2019.
Remaining performance obligations represent contracted revenues that had not yet been recognized, and include deferred revenues; invoices that have been issued to customers but were uncollected and have not been recognized as revenues; and amounts that will be invoiced and recognized as revenues in future periods. As of August 31, 2019, the Company’s remaining performance obligations were $235,194, which it expects to recognize as revenues over the next twelve months and the remainder thereafter.
The Company had not occurred any costs to obtain contracts.
The Company does not have amounts of contract assets since revenue is recognized as control of goods or services is transferred. The contract liabilities consist of advance payments from customers. The contract liabilities are reported in a net position on a customer-by-customer basis at the end of each reporting period. All contract liabilities are expected to be recognized as revenue within one year and are included in other payables and accrued liabilities in the consolidated balance sheet.
Contract balances
The Company’s contract liabilities consist of receipts in advance for software development. Below is the summary presenting the movement of the Company’s contract liabilities for the years ended August 31, 2019 and 2018:
| 2019 | 2018 | |||||||
| Balance as of September 1 | $ | 7,549 | $ | 36,729 | ||||
| Advances received from customers related to unsatisfied performance obligations | 7,978 | 7,748 | ||||||
| Revenue recognized from beginning contract liability balance | (981 | ) | (37,143 | ) | ||||
| Exchange difference | (229 | ) | 215 | |||||
| Balance as of August 31 | $ | 14,317 | $ | 7,549 | ||||
Cost of services provided
Cost of services provided consists primarily of staff costs that are directly attributable to the Company’s principal operations.
Sales and marketing expenses
Sales and marketing expenses consist primarily of marketing and promotional expenses, salaries and other compensation-related expenses to sales and marketing personnel. Advertising expenses consist primarily of costs for the promotion of corporate image and product marketing. The Company expenses all advertising costs as incurred and classifies these costs under sales and marketing expenses. For the years ended August 31, 2019 and 2018, advertising costs totaled $115,659 and nil, respectively.
| F-10 |
Research and development expenses
Research and development (“R&D”) expenses are primary comprised of charges for R&D and consulting work performed by third parties; salaries and benefits for those employees engaged in research, design and development activities; costs related to design tools; and allocated costs. Costs associated with R&D are expensed as incurred and charged as general and administrative expenses
For the years ended August 31, 2019 and 2018, the total R&D expenses were $473,961 and $279,713, respectively.
General and administrative expenses
General and administrative expenses consist primarily of salaries, bonuses and benefits for employees involved in general corporate functions, R&D expenses, depreciation and amortization of fixed assets, legal and other professional services fees, rental and other general corporate related expenses.
Leases
Leases are classified as either capital or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted for as capital leases as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments (net of any incentives received from the lessor) are recognized in the consolidated income statements on a straight-line basis over the lease terms. The Company had no significant capital leases for the years ended August 31, 2019 and 2018.
Accounts receivable
Accounts receivable are stated at the original amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period end. An allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The Company analyzes the aging of the customer accounts, coverage of credit insurance, customer concentrations, customer credit-worthiness, historical and current economic trends and changes in its customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational:
| Expected useful life | ||||
| Furniture and fixtures | 3 years | |||
| Office equipment | 3 years | |||
| Leasehold improvements | 3 years | |||
Impairment of long-lived assets
The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If the assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment has been recorded by the Company for the years ended August 31, 2018 and 2019.
| F-11 |
Equity securities
The Company’s equity securities represent investments in LCHD, which common stock was approved for quotation on the OTC Pink Marketplace quotation system maintained by the OTC Markets Group, Inc. under the symbol “LCHD” on June 27, 2019 and the shares started trading in the OTC market on October 1, 2019.
The equity securities were accounted for as non-marketable securities until October 1, 2019 on the balance sheets and as marketable securities from October 1, 2019.
Prior to October 1, 2019, the Company accounted for the equity securities at cost and only adjusted for other-than-temporary declines in fair value and distributions of earnings. An impairment loss was recognized in the consolidated statements of operations equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment was made. The fair value would then become the new cost basis of investments.
On September 1, 2018, the Company adopted ASU 2016-01 which changed the way it accounts for equity securities. Non-marketable equity securities do not have readily determinable fair value and are accounted for under the measurement alternative method of accounting. These non-marketable investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any cash or stock dividends paid to us on such investments are reported as noninterest income. Marketable equity securities have readily determinable fair value and are accounted at fair value, with changes in fair value recorded through earnings.
Income taxes
Income taxes are determined using an asset and liability method in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
The Company did not have significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of and for the years ended August 31, 2019 and 2018.
The Company conducts its major businesses in Taiwan and the PRC. The Company is subject to tax in these jurisdictions. As a result of its business activities, the Company will file tax returns that are subject to examination by the respective tax authorities.
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.
| F-12 |
The functional currency and the reporting currency of the Company is United States Dollars (“US$”). The Company’s subsidiaries in Taiwan and the PRC maintain their books and record in NT$ and Renminbi (“RMB”), respectively, which are the primary currencies of the economic environment in which the entities operate (the functional currencies).
In general, for consolidation purposes, assets and liabilities of its subsidiary whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statement of retained earnings.
Translation of amounts from foreign currencies into US$1 has been made at the following exchange rates for the respective periods:
| As
of and for the year ended August 31, 2019 | As
of and for the year ended August 31, 2018 | |||||||
| Year-end NT$ : US$ 1 exchange rate | 31.3200 | 30.7000 | ||||||
| Year-average NT$ : US$ 1 exchange rate | 30.9653 | 29.9103 | ||||||
| Year-end RMB : US$ 1 exchange rate | 7.1543 | 6.8300 | ||||||
| Year-average RMB : US$ 1 exchange rate | 6.8544 | 6.5152 | ||||||
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Fair value of financial instruments:
The Company follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The carrying value of the Company’s financial instruments: cash and cash equivalents, accounts and other receivable, accounts and other payables, short-term loans, loans payable and balances with shareholders and directors approximate their fair values because of the short-term nature of these financial instruments or the rate of interest of these instruments approximate the market rate of interest.
| F-13 |
Investments in privately held companies for which the Company elected to record using the measurement alternative are re-measured on a non-recurring basis, and are categorized within Level 3 under the fair value hierarchy.
Stock subscription receivable
The Company records stock issuances at the effective date. If the subscription is not funded upon issuance, the Company records a stock subscription receivable as an asset on a balance sheet. When stock subscription receivables are not received prior to the issuance of financial statements at a reporting date in satisfaction of the requirements under FASB ASC 505-10-45-2, the stock subscription receivable is reclassified as a contra account to stockholders’ equity (deficit) on the balance sheet.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual trade debt at each balance sheet date with the consideration of credit insurance to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Company considers that the Company’s credit risk is significantly reduced.
A customer accounted for 83% of the consolidated net revenue of the Company during the year ended August 31, 2019. Two customers accounted for 48% and 44% of the consolidated net revenue of the Company during the year ended August 31, 2018. There were no other single customers who accounted for 10% or more of the consolidated net revenue of the Company for the years ended August 31, 2019 and 2018.
A customer accounted for 95% of the accounts receivable as of August 31, 2018. There were no other single customers who accounted for 10% or more of the accounts receivable of the Company as of August 31, 2019 and 2018.
Recent accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” and issued certain transitional guidance and subsequent amendments between January 2018 and March 2019 within ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, including ASU 2016-02, “ASC 842”). ASU 2016-02 creates a new topic in ASC 842 “Leases” to replace the current topic in ASC 840 “Leases,” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheets and disclosing key information about leasing arrangements. ASC 842 affects both lessees and lessors, although for the latter the provisions are similar to the current model, but are updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASC 606. The new guidance is effective for the Company for the year ending August 31, 2020 and interim reporting periods during the year ending August 31, 2020. Management expects the primary impact to the Company’s consolidated financial position upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancelable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard is effective for the Company on September 1, 2019. Early adoption is permitted, including in interim periods, and should be applied to all new awards granted after the date of adoption. The Company does not expect this guidance will have a material impact on its consolidated financial statements.
| F-14 |
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company on September 1, 2020 and the new standard did not have a material impact on the consolidated financial statements.
In May 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this ASU address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for the Company for fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on its consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated financial position, statements of operations and cash flows.
3. PLANT AND EQUIPMENT, NET
Plant and equipment as of August 31, 2019 and 2018 are summarized below:
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Furniture and fixtures | $ | 15,757 | $ | 16,075 | ||||
| Office equipment | 35,259 | 25,404 | ||||||
| Leasehold improvements | - | - | ||||||
| Total | 51,016 | 41,479 | ||||||
| Less: Accumulated depreciation | (23,814 | ) | (10,259 | ) | ||||
| Plant and equipment, net | $ | 27,202 | $ | 31,220 | ||||
Depreciation expense, classified as operating expenses, was $14,066 and $10,562 for the years ended August 31, 2019 and 2018 respectively.
| F-15 |
4. ACCOUNTS RECEIVABLE
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Accounts receivable | $ | - | $ | 129,870 | ||||
| Less: allowance for doubtful accounts | - | - | ||||||
| $ | - | $ | 129,870 | |||||
The Company did not record bad debt expense for the years ended August 31, 2019 and 2018.
5. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Deposits paid | $ | 56,426 | $ | - | ||||
| Prepaid expenses | 47,896 | - | ||||||
| Other receivables | 12,307 | - | ||||||
| $ | 116,629 | $ | - | |||||
6. LOANS PAYABLE
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Loans from: | ||||||||
| Chailease Finance Co., Ltd. | $ | 65,852 | $ | 156,759 | ||||
| Leader Capital Holdings Corp. | 762,458 | - | ||||||
| Yi-Hsiu Lin | 43,484 | - | ||||||
| $ | 871,794 | $ | 156,759 | |||||
| Less: current portion | (871,794 | ) | (89,577 | ) | ||||
| Loans payable, non-current | $ | - | 67,182 | |||||
In May 2018, LOC entered into loan agreements with a third party – Chailease Finance Co., Ltd. and borrowed from Chailease Finance Co., Ltd. a total amount of $184,337 (NT$ 5,500,000). The loans are unsecured, bear fixed interest at 6.29% per annum and are repayable in 24 monthly installments through May 2020. The loans were fully repaid on June 1, 2020.
From April 2019, LOC entered into multiple loan agreements with LCHD and borrowed from LCHD a total amount of $579,335 as of August 31, 2019. The loans are secured by personal guarantees of certain of the Company’s shareholders, bear fixed interest at 8% per annum, and are due on various dates through September 2020. Upon the expiration of these loans, LCHD has agreed to extend the terms of the loans for one year. Interest of $6,635 was accrued as of August 31, 2019.
From May 2019, BJDC entered into multiple short-term loan agreements with LCHD and borrowed from LCHD a total amount of $183,123 as of August 31, 2019. The loans are secured by personal guarantees of certain of the Company’s shareholders, bear interest at 8% per annum, and are due on various dates through July 2020. Upon the expiration of these loans, LCHD has agreed to extend the terms of the loans for one year. Interest of $3,068 was accrued as of August 31, 2019.
On June 12, 2019, BJDC also entered into a one-year loan agreement with Mr. Lin Yi-Hsiu, Chief Executive Officer of LCHD, and borrowed $43,484 (RMB 311,094) from him as of August 31, 2019. On March 1, 2020, BJDC, Mr. Lin Yi-Hsiu and LCHD entered into a tripartite agreement that LCHD repaid all loans to Mr. Lin Yi-Hsiu on behalf of BJDC and got the rights of lender in succession. The loan is secured by personal guarantees of certain of the Company’s shareholders, bears interest at 8% per annum, and is due on various dates through February 2021. Interest of $762 was accrued as of August 31, 2019.
| F-16 |
7. ACCRUED EXPENSES AND OTHER PAYABLES
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Accrued payroll | $ | 83,728 | $ | 35,538 | ||||
| Other accrued expenses | 12,887 | 1,629 | ||||||
| Accrued loan interests | 10,465 | - | ||||||
| Other payables | 20,522 | 3,585 | ||||||
| $ | 127,602 | $ | 40,752 | |||||
8. RELATED PARTY BALANCES AND TRANSACTIONS
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Due from Cheng Hung-Pin (a director and a shareholder) | $ | 723 | $ | - | ||||
| Due (to) from a shareholder: | ||||||||
| Tu Yu-Cheng | $ | (484,534 | ) | $ | 58,805 | |||
All the above balances are unsecured, interest-free with no fixed payment term.
On October 1, 2017, LOC leased an office in Tai Chung, Taiwan from Goodweber Network Holdings Co. which was held by the Company’s director – Cheng Hung-Pin. The monthly rental was $1,274 (NT$38,095). On April 1, 2019, LOC leased the same office from the Company’s shareholder – Tu Yu-Cheng. The monthly rental was $1,453 (NT$45,000) with a term of one year. On April 1, 2020, the Company renewed the lease for an additional one year term. During the years ended August 31, 2019 and 2018, the Company paid rental amounts of $11,880 and $14,010 that are included in general and administrative expenses respectively.
During the year ended August 31, 2019 and 2018, Tu Yu-Cheng charged the Company a total of $101,456 and $nil respectively for technical support services provided by him.
9. INCOME TAXES
For the years ended August 31, 2019 and 2018, the local (United States) and foreign components of (loss) profit before income tax comprised of the following:
| Year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Tax jurisdictions from: | ||||||||
| - Local | $ | (793 | ) | $ | - | |||
| - Foreign, representing | ||||||||
| Taiwan | (490,820 | ) | (132,665 | ) | ||||
| PRC | (251,430 | ) | 41,301 | |||||
| Loss before income tax | $ | (743,043 | ) | $ | (91,364 | ) | ||
British Virgin Islands
The Company is tax exempted in the British Virgin Islands where it was incorporated.
Taiwan
LOC is subject to corporate income tax (“CIT”) in Taiwan. With effect from January 1, 2018, the CIT rate in Taiwan increase from the previous 17% to 20%. However, for profit-seeking entities with less than NT$ 500,000 (approximately $16,000) in taxable income, the CIT rate is 18% in 2018, 19% in 2019, and 20% in 2020 if taxable income exceeds NT$120,000 (approximately $4,000).
| F-17 |
BJDC is subject to corporate income tax (“CIT”) at 25% in accordance with the relevant tax laws and regulations of the PRC.
The components of the provision for income taxes expenses are:
| Year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Current | $ | 26 | $ | - | ||||
| Deferred | - | - | ||||||
| Total income tax expense | $ | 26 | $ | - | ||||
The reconciliation of income tax expenses (benefit) computed at the Taiwan statutory tax rate to income tax expense is as follows:
| Year ended August 31, | ||||||||
| 2019 | 2018 | |||||||
| Loss before income taxes | $ | (743,043 | ) | $ | (91,364 | ) | ||
| Taiwan statutory income tax rate1 | 19 | % | 18 | % | ||||
| Income tax credit computed at statutory income rate | (141,178 | ) | (16,445 | ) | ||||
| Reconciling items: | ||||||||
| Non-deductible expenses | 4,365 | 267 | ||||||
| Tax effect of tax exempt entity | 151 | - | ||||||
| Effect of Taiwan tax rate change | 7,431 | - | ||||||
| Rate differential in different tax jurisdictions | (15,086 | ) | 2,891 | |||||
| Valuation allowance on deferred tax assets | 144,343 | 13,287 | ||||||
| Income tax expense | $ | 26 | $ | - | ||||
1 The Taiwan statutory income tax rate was used because the majority of the Company’s operations are based in Taiwan. The tax rate is adopted in accordance with Income Basic Tax Act.
Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference:
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 726,151 | $ | - | ||||
| Less: valuation allowance | (726,151 | ) | - | |||||
| $ | - | $ | - | |||||
As of August 31, 2019 and 2018, LOC had net operating loss carry-forwards in Taiwan of $485,261 and $nil, respectively, which will expire in various years through 2024.
As of August 31, 2019 and 2018, BJDC had net operating loss carry-forwards in the PRC of $240,890 and $nil, respectively, which will expire in various years through 2026.
Valuation allowance was provided against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred tax assets will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards and others, which can be carried forward to offset future taxable income. The management determines it is more likely than not that part of deferred tax assets could not be utilized, so allowance was provided as of August 31, 2019 and 2018. Movement of valuation allowance is as follow:
| As of August 31, | ||||||||
| 2019 | 2018 | |||||||
| Balance at beginning of the year | $ | - | $ | - | ||||
| Additions | 726,151 | - | ||||||
| Balance at end of the year | $ | 726,151 | $ | - | ||||
| F-18 |
10. COMMON STOCK
The share capital balance as of August 31, 2018 represented the combined issued capital of LOC and BJDC. The share capital balance as of August 31, 2019 represented the issued share capital of the Company.
Neither stock issuance was funded as of August 31, 2019 and therefore are presented in the balance sheet as stock subscriptions receivable.
11. COMMITMENTS AND CONTINGENCIES
Leases
During the year ended August 31, 2019, the Company entered into agreements with independent third parties and a shareholder to lease office premises in Taiwan and Beijing for the operations of the Company. Rental expense for the years ended August 31, 2019 and 2018 was $152,890 and $56,044, respectively.
As of August 31, 2019, the Company has future minimal payments under non-cancellable operating leases on office premises with initial terms of one to three years as follows:
| Year ending August 31, | Third parties | A shareholder | ||||||
| 2020 | $ | 89,321 | $ | 10,057 | ||||
| 2021 | 58,375 | - | ||||||
| 2022 | 52,186 | - | ||||||
| 2023 | - | - | ||||||
| 2024 | - | - | ||||||
| Thereafter | - | - | ||||||
| $ | 199,882 | $ | 10,057 | |||||
Contingencies
The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of the severance payments if employees are terminated due to restructuring, termination as a result of a mutual agreement or termination as a result of the expiration of a fixed-term labor contract. The Company has estimated its possible severance payments of approximately $40,000 and $25,000 as of August 31, 2019 and 2018, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
In Taiwan, an employer can terminate an employment contract with notice (or with pay in lieu of notice) and with severance pay only due to stoppage of business or a transfer of ownership, business losses or curtailment of business operations, suspension of operations due to a force majeure event, or alteration of the business nature, forcing a reduction in the number of employees, and those employees cannot be reassigned to other suitable positions, or the employee is incapable of performing the tasks assigned. The Company has estimated its possible severance payments of approximately $10,000 and $3,000 as of August 31, 2019 and 2018, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
| F-19 |
12. SUBSEQUENT EVENTS
From September 2019 through August, 2020, the Company entered into various short-term loan agreements with LCHD, and borrowed from LCHD additional amount totaled $841,971. The loans are unsecured, bear interest at 8% per annum, and are due on various dates through August 2021.
On September 2, 2019, the Company reached an agreement to repay the amount owed to Tu Yu-Cheng of $446,999 in the form of 908,678 restricted common shares of LCHD owned by the Company.
On August 17, 2020 (the “Closing Date”), LCHD, a Nevada corporation through its wholly-owned subsidiary JFB Internet Service Limited, a company incorporated and existing under the laws of Hong Kong (the “Buyer”), acquired all of the issued and outstanding capital stock (the “Acquisition”) of NPI pursuant to the terms and conditions of that a Stock Purchase Agreement, dated as of the Closing Date (the “Purchase Agreement”), among LCHD, the Buyer, NPI and the selling shareholders of NPI.
As a result of the Acquisition, LCHD now owns, indirectly through the Buyer, 100% of NPI.
The aggregate purchase price for the Acquisition was $4,850,000, less certain discounts, expenses and reductions for outstanding NPI debt owed to LCHD and/or its affiliates, resulting in a net purchase price of $3,506,042, payable in 8,415,111 shares of LCHD’s common stock to the Sellers in accordance with their respective pro rata percentage.
| F-20 |
Exhibit 99.2
NICE PRODUCTS INC.
Contents
| F-1 |
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 2020 AND AUGUST 31, 2019 (UNAUDITED)
(In U.S. dollars)
| May 31, | August 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 27,023 | $ | 209,679 | ||||
| Prepayments, deposits and other receivables | 128,977 | 116,629 | ||||||
| Due from a director | 33,322 | 723 | ||||||
| Due from shareholders | 34,020 | - | ||||||
| Tax recoverable | 2,776 | - | ||||||
| Total current assets | 226,118 | 327,031 | ||||||
| Non-marketable equity securities | - | 446,999 | ||||||
| Plant and equipment, net | 25,442 | 27,202 | ||||||
| Operating lease right-of-use assets, net | 131,157 | - | ||||||
| TOTAL ASSETS | $ | 382,717 | $ | 801,232 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accrued expenses and other payables | 240,424 | 127,602 | ||||||
| Contract liabilities | 16,057 | 14,317 | ||||||
| Loans payable, current | 2,178,001 | 871,794 | ||||||
| Due to a shareholder | 115,079 | 484,534 | ||||||
| Tax payable | - | 14,358 | ||||||
| Operating lease liability, current | 66,570 | - | ||||||
| Total current liabilities | 2,616,131 | 1,512,605 | ||||||
| Non-current liabilities | ||||||||
| Operating lease liability, non-current | 64,725 | - | ||||||
| 64,725 | - | |||||||
| TOTAL LIABILITIES | $ | 2,680,856 | $ | 1,512,605 | ||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Issued share capital | 3,500,000 | 3,500,000 | ||||||
| Stock subscriptions receivable | (3,500,000 | ) | (3,500,000 | ) | ||||
| Additional paid-in capital | 211,194 | 197,203 | ||||||
| Accumulated other comprehensive (loss) income | (9,145 | ) | 15,892 | |||||
| Accumulated deficits | (2,500,188 | ) | (924,468 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | $ | (2,298,139 | ) | $ | (711,373 | ) | ||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 382,717 | $ | 801,232 | ||||
See accompanying notes to the condensed consolidated financial statements.
| F-2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE NINE AND THREE MONTHS ENDED MAY 31, 2020 AND 2019 (UNAUDITED)
(In U.S. dollars)
| Nine months ended May 31, | Three months ended May 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUE | $ | 18,659 | $ | 505,971 | $ | 11,945 | $ | 433,271 | ||||||||
| Cost of services provided | (306 | ) | (25,396 | ) | (306 | ) | (14 | ) | ||||||||
| Sales and marketing expenses | (214,956 | ) | (13,657 | ) | (59,297 | ) | (10,805 | ) | ||||||||
| General and administrative | (1,313,540 | ) | (708,626 | ) | (436,655 | ) | (251,788 | ) | ||||||||
| (LOSS) PROFIT FROM OPERATIONS | (1,510,143 | ) | (241,708 | ) | (484,313 | ) | 170,664 | |||||||||
| Interest expenses | (99,815 | ) | (9,021 | ) | (43,264 | ) | (3,404 | ) | ||||||||
| Other income | 34,238 | 2,360 | 12,122 | 976 | ||||||||||||
| (LOSS) PROFIT BEFORE INCOME TAX | (1,575,720 | ) | (248,369 | ) | (515,455 | ) | 168,236 | |||||||||
| Income tax expense | - | (26 | ) | - | (26 | ) | ||||||||||
| NET (LOSS) PROFIT | $ | (1,575,720 | ) | $ | (248,395 | ) | $ | (515,455 | ) | $ | 168,210 | |||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Foreign currency transaction (loss) gain | (25,037 | ) | 4,292 | 5,959 | 5,004 | |||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (1,600,757 | ) | $ | (244,103 | ) | $ | (509,496 | ) | $ | 173,214 | |||||
See accompanying notes to the condensed consolidated financial statements.
| F-3 |
CONDENSED CONSOLDIATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED MAY 31, 2020 AND 2019
(In U.S. dollars)
| ISSUED SHARE CAPITAL | STOCK SUBSCRIPTIONS RECEIVABLE | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED OTHER COMPREHENSIVE LOSS |
ACCUMULATED DEFICITS | TOTAL STOCKHOLDERS’ DEFICIT |
|||||||||||||||||||
| Balance as of September 1, 2019 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 197,203 | $ | 15,892 | $ | (924,468 | ) | $ | (711,373 | ) | |||||||||
| Adjustment due to change of investee’s equity (note 1) | - | - | 13,991 | - | - | 13,991 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | (25,037 | ) | - | (25,037 | ) | ||||||||||||||||
| Net loss | - | - | - | - | (1,575,720 | ) | (1,575,720 | ) | ||||||||||||||||
| Balance as of May 31, 2020 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 211,194 | $ | (9,145 | ) | $ | (2,500,188 | ) | $ | (2,298,139 | ) | ||||||||
| Balance as of September 1, 2018 | $ | 197,203 | $ | - | $ | - | $ | (366 | ) | $ | (181,399 | ) | $ | 15,438 | ||||||||||
| Reclassification arising from reorganization (note 1) | (197,203 | ) | - | 197,203 | - | - | - | |||||||||||||||||
| Issuance of shares | 3,500,000 | (3,500,000 | ) | - | - | - | - | |||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 4,292 | - | 4,292 | ||||||||||||||||||
| Net loss | - | - | - | - | (248,395 | ) | (248,395 | ) | ||||||||||||||||
| Balance as of May 31, 2019 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 197,203 | $ | 3,926 | $ | (429,794 | ) | $ | (228,665 | ) | |||||||||
| F-4 |
NICE PRODUCTS INC.
CONDENSED CONSOLDIATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MAY 31, 2020 AND 2019
(In U.S. dollars)
| ISSUED SHARE CAPITAL | STOCK SUBSCRIPTIONS RECEIVABLE | ADDITIONAL PAID-IN CAPITAL | ACCUMULATED OTHER COMPREHENSIVE LOSS |
ACCUMULATED DEFICITS | TOTAL STOCKHOLDERS’ DEFICIT |
|||||||||||||||||||
| Balance as of March 1, 2020 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 197,203 | $ | (15,104 | ) | $ | (1,984,734 | ) | $ | (1,802,635 | ) | ||||||||
| Adjustment due to change of investee’s equity | - | - | 13,991 | - | - | 13,991 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 5,959 | - | 5,959 | ||||||||||||||||||
| Net loss | - | - | - | - | (515,454 | ) | (515,454 | ) | ||||||||||||||||
| Balance as of May 31, 2020 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 211,194 | $ | (9,145 | ) | $ | (2,500,188 | ) | $ | (2,298,139 | ) | ||||||||
| Balance as of March 1, 2019 | $ | 197,203 | $ | - | $ | - | $ | (1,078 | ) | $ | (598,004 | ) | $ | (401,879 | ) | |||||||||
| Reclassification arising from reorganization | (197,203 | ) | - | 197,203 | - | - | - | |||||||||||||||||
| Issuance of shares | 3,500,000 | (3,500,000 | ) | - | - | - | - | |||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 5,004 | - | 5,004 | ||||||||||||||||||
| Net loss | - | - | - | - | 168,210 | 168,210 | ||||||||||||||||||
| Balance as of May 31, 2019 | $ | 3,500,000 | $ | (3,500,000 | ) | $ | 197,203 | $ | 3,926 | $ | (429,794 | ) | $ | (228,665 | ) | |||||||||
See accompanying notes to the condensed consolidated financial statements.
| F-5 |
CONDENSED CONSOLDIATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In U.S. dollars)
| For the nine months ended May 31, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,575,720 | ) | $ | (248,395 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 11,867 | 10,438 | ||||||
| Software development income | - | (431,989 | ) | |||||
| Amortization of operating lease right-of-use assets | 76,336 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | 126,810 | ||||||
| Prepayments, deposits and other receivables | (7,999 | ) | (47,785 | ) | ||||
| Tax recoverable | (4,506 | ) | - | |||||
| Advance to a director | - | (18,438 | ) | |||||
| Other payables and accrued liabilities | 73,012 | 41,384 | ||||||
| Contract liabilities | 1,104 | 6,665 | ||||||
| Tax payable | (13,001 | ) | (11,261 | ) | ||||
| Operating lease liabilities | (76,193 | ) | - | |||||
| Net cash used in operating activities | (1,515,100 | ) | (572,571 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | (9,298 | ) | (2,836 | ) | ||||
| Loan to a director | (32,993 | ) | - | |||||
| Net cash used in investing activities | (42,291 | ) | (2,836 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from loans | 1,339,758 | 194,489 | ||||||
| Repayment of loans | (64,179 | ) | (66,823 | ) | ||||
| Repayment from a director | 745 | - | ||||||
| Advance from a shareholder | 86,159 | 491,702 | ||||||
| Net cash provided by financing activities | 1,362,483 | 619,368 | ||||||
| Effect of exchange rate fluctuations on cash and cash equivalents | 12,252 | 327 | ||||||
| Net (decrease) increase in cash and cash equivalents | (182,656 | ) | 44,288 | |||||
| Cash and cash equivalents, beginning of period | 209,679 | 7,822 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 27,023 | $ | 52,110 | ||||
| SUPPLEMENTAL CASH FLOWS INFORMATION | ||||||||
| Cash paid for income taxes | $ | - | $ | 26 | ||||
| Cash paid for interest paid | $ | 6,832 | $ | 6,407 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Software development
income payable in the form of common shares of LCHD (Note 2) |
$ | - | $ | 431,989 | ||||
| Settlement of payable to a shareholder in the form of restricted common shares of LCHD owned by the Company (note 5) | 461,903 | - | ||||||
See accompanying notes to the condensed consolidated financial statements.
| F-6 |
NICE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the NINE MONTHS ended MAY 31, 2020 and 2019
(In U.S. dollars)
1. TITLE, ORGANIZATION AND REORGANIZATION
Nice Products Inc. (“Nice Products” or “NPI” or the “Company”) was incorporated in the British Virgin Islands on December 17, 2018.
The Company, through its subsidiaries, mainly engages in the development of ecological-systems applications, integration of big data and promotion of OTT applications.
| Company name | Place/date of incorporation | Principal activities | |||
| 1. | LOC Weibo Co., Ltd. (“LOC”) | Republic of China/September 29, 2017 | Development of ecological-systems applications, integration of big data and promotion of OTT applications | ||
| 2. | Beijing DataComm Cloud Media Technology Co., Ltd. (“BJDC”) | People’s Republic of China /April 16, 2013 | Development of ecological-systems applications, integration of big data and promotion of OTT applications | ||
The formation of Nice Products Inc. was completed in December 2018. The share capital of the Company is $3,500,000 divided into 50,000 shares of $70 par value each. On December 17, 2018, the Company issued an aggregate of 50,000 shares to five investors. The Company is owned and controlled by the same control group as LOC and BJDC. On July 19, 2019 and March 1, 2019, the beneficial shareholders of LOC and BJDC exchanged 100% of their shareholding of LOC and BJDC for the shares of the Company (the “Share Exchange”) respectively. The Share Exchange has been accounted for as a common control transaction. Other than its 100% ownership of LOC and BJDC, Nice Products has no significant assets and no other business operations.
These consolidated financial statements have been titled “Nice Products Inc.” because:
| 1. | Nice Products Inc. is the holding company of LOC and BJDC, and the operations of the Company. |
| 2. | Other than its 100% ownership of LOC and BJDC, Nice Products Inc. has no significant assets and no other business operations. |
Nice Products Inc. and its subsidiaries are hereinafter referred to as the “Company”.
Organization and reorganization
LOC was incorporated in Republic of China on September 29, 2017 as a company with limited liability. Upon incorporation, LOC issued 500,000 ordinary shares to five individuals who held the shares on behalf of the shareholders of Nice Products at New Taiwanese dollars (“NT$”) 10 each.
BJDC was incorporated in the People’s Republic of China (the “PRC”) as a company with limited liability on April 16, 2013. Upon incorporation, BJDC issued 200,000 ordinary shares (at $32,350) to an individual. Under a trust agreement, BJDC was set up by an individual on behalf of the shareholders of Nice Products. On April 3 2019, BJDC issued additional 100,000 ordinary shares (at $13,991). On September 30, 2019, the Company fulfilled its capital commitment.
The acquisition of LOC and BJDC by Nice Products has been accounted for as common control transactions in a manner similar to a pooling of interests and there was no recognition of any goodwill or excess of the acquirers’ interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over cost at the time of the common control combinations. Therefore, these transactions were recorded at historical cost with a reclassification of equity from retained profits to additional paid in capital to reflect the deemed value of consideration given in the local jurisdiction and the capital structure of LOC and BJDC.
| F-7 |
On August 17, 2020, Leader Capital Holdings Corp. (“LCHD”) entered into a share purchase agreement (the “Purchase Agreement”) with the Company to acquire all the issued and outstanding shares of the Company. Under the terms of the Purchase Agreement, LCHD agreed to issue 8,415,111 shares of its common stock to the owners of the Company.
On August 21, 2020, LCHD filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) announcing the completion of a business combination between LCHD and NPI in accordance with the terms of the Purchase Agreement. As a result of the transaction, NPI became a wholly-owned subsidiary of LCHD and the shareholders of NPI became the holders of approximately 6.49% of LCHD’s issued and outstanding capital stock on a fully-diluted basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the financial statements of Nice Products Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company has adopted August 31 as its fiscal year end.
The interim unaudited condensed consolidated financial information as of May 31, 2020 and August 31, 2019, and for the nine and three months periods ended May 31, 2020 and 2019 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with U.S. GAAP have not been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company for the year ended August 31, 2019, on the Current Report on Form 8-K of LCHD filed with the SEC on November 16, 2020.
In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these unaudited condensed consolidated financial statements, which are of a normal and recurring nature, have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year.
Going concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The Company has suffered recurring losses from operations, and records an accumulated deficit and a net working capital deficit of $2,500,188 and $2,390,013, respectively, as of May 31, 2020. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due.
The Company expects to finance its operations primarily through cash flows from operations, loans from existing directors and shareholders. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, a shareholder has indicated the intent and ability to provide additional financing. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, workforces, customers, and created significant volatility and disruption of financial markets. It has also disrupted the normal operations of many businesses, including the Company’s businesses. This outbreak could decrease spending, adversely affect demand for the Company’s services and harm its business and results of operations. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on its business or results of operations at this time.
These unaudited condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as going concern.
| F-8 |
Use of estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for the Company’s business, and adversely impact its results of operations. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Its estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in its unaudited condensed consolidated financial statements.
Identified below are the accounting policies that reflect the Company’s most significant estimates and judgments, and those that the Company believes are the most critical to fully understanding and evaluating its condensed consolidated financial statements.
Basis of consolidation
The unaudited condensed consolidated financial statements of the Company include all of the accounts of the Company and its subsidiaries, LOC and BJDC for all periods presented. All material intercompany transactions and balances have been eliminated in the consolidation.
Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
Software development costs
The Company expenses software development costs, including costs to develop software products or the software component of products to be marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.
| F-9 |
Revenue recognition
The Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09:
| Step 1: Identify the contract | |
| Step 2: Identify the performance obligations | |
| Step 3: Determine the transaction price | |
| Step 4: Allocate the transaction price | |
| Step 5: Recognize revenue |
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, which may occur at a point in time or over time depending on the terms and conditions of the agreement, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company entered into several agreements with third party customers to assist the customers in the development of their mobile communications software and mobile e-commerce software. LOC also joined forces with LCHD (a company incorporated in Nevada and whose shares are quoted on the OTC Pink Marketplace quotation system maintained by the OTC Markets Group, Inc. under the symbol “LCHD”) in 2019 to launch a Unicorn-class app - FinMaster.
Income from provision of software development service and maintenance service are recognized when the service is performed.
Revenue by recognition over time vs point in time
| Nine months ended May 31, | Three months ended May 31 | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue by recognition over time | $ | 18,659 | $ | 505,971 | $ | 11,945 | $ | 433,271 | ||||||||
| Revenue by recognition at a point in time | - | - | - | - | ||||||||||||
| $ | 18,659 | $ | 505,971 | $ | 11,945 | $ | 433,271 | |||||||||
On September 1, 2018, LOC was appointed by LCHD to develop a mobile application in four stages for a total consideration of NT$20,000,000 ($651,466), payable in the form of common shares of the Company. As of May 31, 2019, the first and second stages of development for the basic functions of the mobile application have been completed, and the Company has issued a total of 908,678 of restricted common shares in aggregate at $0.50 per share for the work completed up to May 31, 2020. The Company has recognized income of $nil and $431,989 (NT$13,333,333) for the nine and three months ended May 31, 2020 and 2019, respectively.
Remaining performance obligations represent contracted revenues that had not yet been recognized, and include deferred revenues; invoices that have been issued to customers but were uncollected and have not been recognized as revenues; and amounts that will be invoiced and recognized as revenues in future periods. As of May 31, 2020, the Company’s remaining performance obligations were $192,862, which it expects to recognize as revenues over the next twelve months and the remainder thereafter.
The Company had not occurred any costs to obtain contracts.
| F-10 |
The Company does not have amounts of contract assets since revenue is recognized as control of goods or services is transferred. The contract liabilities consist of advance payments from customers. The contract liabilities are reported in a net position on a customer-by-customer basis at the end of each reporting period. All contract liabilities are expected to be recognized as revenue within one year and are included in other payables and accrued liabilities in the consolidated balance sheet.
Contract balances
The Company’s contract liabilities consist of receipts in advance for software development. Below is the summary presenting the movement of the Company’s contract liabilities for the nine months ended May 31, 2020:
| Receipt in advance | ||||
| Balance as of September 1, 2019 | $ | 14,317 | ||
| Advances received from customers related to unsatisfied performance obligations | 2,425 | |||
| Revenue recognized from beginning contract liability balance | (1,321 | ) | ||
| Exchange difference | 636 | |||
| Balance as of May 31, 2020 | $ | 16,057 | ||
Cost of services provided
Cost of services provided consists primarily of staff costs that are directly attributable to the Company’s principal operations.
Sales and marketing expenses
Sales and marketing expenses consist primarily of marketing and promotional expenses, salaries and other compensation-related expenses to sales and marketing personnel. Advertising expenses consist primarily of costs for the promotion of corporate image and product marketing. The Company expenses all advertising costs as incurred and classifies these costs under sales and marketing expenses. For the nine months ended May 31, 2020 and 2019, advertising costs totaled $179,154 and $10,792, respectively. For the three months ended May 31, 2020 and 2019, advertising costs totaled $23,495 and $7,941, respectively.
From September, 2019, customers or users of the Company’s mobile application can obtain points through ways such as frequent sign-ins to the Company’s mobile application, sharing articles from the application to users’ own social media. The Company believes these points are to encourage user engagement and generate market awareness. As a result, the Company accounts for such points as selling and marketing expenses with a corresponding liability recorded under other current liabilities of its condensed consolidated balance sheets upon the points offering. The Company estimates liabilities under the customer loyalty program based on cost of the merchandise that can be redeemed, and its estimate of probability of redemption. At the time of redemption, the Company records a reduction of inventory and other current liabilities.
Since historical information is limited for the Company to determine any potential points forfeiture and most merchandise can be redeemed without requiring a significant amount of points compared with the amount of points provided to users, the Company has used an estimated forfeiture rate of zero.
For the nine months ended May 31, 2020 and 2019, the total points recorded as selling and marketing expenses were $28,130 and $nil, respectively. For the three months ended May 31, 2020 and 2019, the total points recorded as selling and marketing expenses were $nil.
As of May 31, 2020 and August 31, 2019, liabilities recorded related to unredeemed points were $36,160 and $nil, respectively.
Research and development expenses
Research and development (“R&D”) expenses are primary comprised of charges for R&D and consulting work performed by third parties; salaries and benefits for those employees engaged in research, design and development activities; costs related to design tools; and allocated costs. Costs associated with R&D are expensed as incurred and charged as general and administrative expenses
| F-11 |
For the nine months ended May 31, 2020 and 2019, the total R&D expenses were $306,632 and $241,369, respectively. For the three months ended May 31, 2020 and 2019, the total R&D expenses were $99,817 and $14,413, respectively.
General and administrative expenses
General and administrative expenses consist primarily of salaries, bonuses and benefits for employees involved in general corporate functions, R&D expenses, depreciation and amortization of fixed assets, legal and other professional services fees, rental and other general corporate related expenses.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. The lease has remaining lease term of approximately four years. Lease expense is recognized on a straight-line basis over the lease term. The Company elected the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases associated with the Company’s office space lease, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
The operating lease is included in operating lease right-of-use assets, operating lease liabilities-current and operating lease liabilities-non-current on the Company’s condensed consolidated balance sheets.
Accounts receivable
Accounts receivable are stated at the original amount less an allowance for doubtful receivables, if any, based on a review of all outstanding amounts at period end. An allowance is also made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The Company analyzes the aging of the customer accounts, coverage of credit insurance, customer concentrations, customer credit-worthiness, historical and current economic trends and changes in its customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational:
Expected useful life | ||||
| Furniture and fixtures | 3 years | |||
| Office equipment | 3 years | |||
| Leasehold improvements | 3 years |
| F-12 |
Impairment of long-lived assets
The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If the assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment has been recorded by the Company for the nine and three months ended May 31, 2020 and 2019.
Equity securities
The Company’s equity securities represent investments in LCHD, which common stock was approved for quotation on the OTC Pink Marketplace quotation system maintained by the OTC Markets Group, Inc. under the symbol “LCHD” on June 27, 2019 and the shares started trading in the OTC market on October 1, 2019.
The equity securities were accounted for as non-marketable securities until October 1, 2019 on the balance sheets and as marketable securities from October 1, 2019.
Prior to October 1, 2019, the Company accounted for the equity securities at cost and only adjusted for other-than-temporary declines in fair value and distributions of earnings. An impairment loss was recognized in the consolidated statements of operations equal to the excess of the investment’s cost over its fair value at the balance sheet date of the reporting period for which the assessment was made. The fair value would then become the new cost basis of investments.
On September 1, 2018, the Company adopted ASU 2016-01 which changed the way it accounts for equity securities. Non-marketable equity securities do not have readily determinable fair value and are accounted for under the measurement alternative method of accounting. These non-marketable investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any cash or stock dividends paid to us on such investments are reported as noninterest income. Marketable equity securities have readily determinable fair value and are accounted at fair value, with changes in fair value recorded through earnings.
Income taxes
Income taxes are determined using an asset and liability method in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
The Company did not have significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of and for the nine and three months ended May 31, 2020 and 2019.
The Company conducts its major businesses in Taiwan and the People’s Republic of China (the “PRC”). The Company is subject to tax in these jurisdictions. As a result of its business activities, the Company will file tax returns that are subject to examination by the respective tax authorities.
| F-13 |
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.
The functional currency and the reporting currency of the Company is United States Dollars (“US$”). The Company’s subsidiaries in Taiwan and the PRC maintain their books and record in NT$ and Renminbi (“RMB”), respectively, which are the primary currencies of the economic environment in which the entities operate (the functional currencies).
In general, for consolidation purposes, assets and liabilities of its subsidiary whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statement of retained earnings.
Translation of amounts from foreign currencies into US$1 has been made at the following exchange rates for the respective periods:
| Nine months ended May 31, | ||||||||
| 2020 | 2019 | |||||||
| Period-average NT$ : US$ 1 exchange rate | 30.309 | 30.685 | ||||||
| Period-average RMB : US$ 1 exchange rate | 7.0393 | 6.8216 | ||||||
| As
of May 31, 2020 |
As
of August 31, 2019 |
|||||||
| Period-end NT$ : US$ 1 exchange rate | 30.010 | 31.320 | ||||||
| Period-end RMB : US$ 1 exchange rate | 7.1348 | 7.1543 | ||||||
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Fair value of financial instruments:
The Company follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
| F-14 |
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The carrying value of the Company’s financial instruments: cash and cash equivalents, accounts and other receivable, accounts and other payables, short-term loans, loans payable and balances with shareholders and directors approximate their fair values because of the short-term nature of these financial instruments or the rate of interest of these instruments approximate the market rate of interest.
The marketable equity securities are accounted at fair value, with changes in fair value recorded through earnings. The fair value of marketable equity securities was determined using the quote price in the active market, with Level 1 inputs.
Stock subscription receivable
The Company records stock issuances at the effective date. If the subscription is not funded upon issuance, the Company records a stock subscription receivable as an asset on the balance sheet. When stock subscription receivables are not received prior to the issuance of financial statements at a reporting date in satisfaction of the requirements under FASB ASC 505-10-45-2, the stock subscription receivable is reclassified as a contra account to stockholders’ equity (deficit) on the balance sheet.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral or other security. In order to minimize the credit risk, the management of the Company has delegated a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. Further, the Company reviews the recoverable amount of each individual trade debt at each balance sheet date with the consideration of credit insurance to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the management of the Company considers that the Company’s credit risk is significantly reduced.
2 customers accounted for 88% and 11% of the consolidated net revenue of the Company during the nine months ended May 31, 2020. A customer accounted for 92% of the consolidated net revenue of the Company during the three months ended May 31, 2020. A customer accounted for 85% and 99% of the consolidated net revenue of the Company during the nine and three months ended May 31, 2019. There were no other single customers who accounted for 10% or more of the consolidated net revenue of the Company for the three and nine months ended May 31, 2020 and 2019.
No customers accounted for over 10% of the accounts receivable as of May 31, 2020 and August 31, 2019.
Recent accounting pronouncements
Recently Adopted Accounting Standards
On September 1, 2019, the Company adopted ASU 2016-02, Leases, using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these unaudited condensed consolidated financial statements. As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less.
As a result of the adoption of the standard, based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized ROU assets of $131,157 and lease liabilities of $131,295, on its unaudited condensed consolidated balance sheet as of May 31, 2020. The assets and liabilities recognized upon application of the transition provisions were primarily associated with existing office leases. There were no finance leases as of May 31, 2020.
| F-15 |
Accounting Pronouncements Issued But Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company on September 1, 2020 and the new standard did not have a material impact on the consolidated financial statements.
In May 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this ASU address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. ASU 2019-05 is effective for “smaller reporting companies” for fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its condensed consolidated financial statements and related disclosures.
Except for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the consolidated financial position, statements of operations and cash flows.
3. PLANT AND EQUIPMENT, NET
Plant and equipment as of May 31, 2020 and August 31, 2019 is summarized below:
| As of May 31, | As of August 31, | |||||||
| 2020 | 2019 | |||||||
| Furniture and fixtures | $ | 16,445 | $ | 15,757 | ||||
| Office equipment | 42,932 | 35,259 | ||||||
| Leasehold improvements | 2,688 | - | ||||||
| Total | 62,065 | 51,016 | ||||||
| Less: Accumulated depreciation | (36,623 | ) | (23,814 | ) | ||||
| Plant and equipment, net | $ | 25,442 | $ | 27,202 | ||||
Depreciation expense, classified as operating expenses, was $11,867 and $10,438 for the nine months ended May 31, 2020 and 2019 respectively. Depreciation expense, classified as operating expenses, was $4,157 and $3,598 for the three months ended May 31, 2020 and 2019 respectively.
| F-16 |
4. LOANS PAYABLE
| As of May 31, | As of August 31, | |||||||
| 2020 | 2019 | |||||||
| Loans from: | ||||||||
| Chailease Finance Co., Ltd. | $ | 3,908 | $ | 65,852 | ||||
| Leader Capital Holdings Corp. | 2,174,093 | 762,458 | ||||||
| Yi-Hsiu Lin | - | 43,484 | ||||||
| $ | 2,178,001 | $ | 871,794 | |||||
| Less: current portion | (2,178,001 | ) | (871,794 | ) | ||||
| Loans payable, non-current | $ | - | $ | - | ||||
In May 2018, LOC entered into loan agreements with a third party – Chailease Finance Co., Ltd. and borrowed from Chailease Finance Co., Ltd. a total amount of $184,337 (NT$5,500,000). The loans are unsecured, bear fixed interest at 6.29% per annum and are repayable in 24 monthly installments through May 2020. The loans were fully repaid on June 1, 2020.
From April 2019, LOC entered into multiple loan agreements with LCHD and borrowed from LCHD a total amount of $1,487,372 and $579,335 as of May 31, 2020 and August 31, 2019, respectively. The loans are secured by personal guarantees of certain of its shareholders, bear fixed interest at 8% per annum, and are due on various dates through May 2021. Upon the expiration of these loans, LCHD has agreed to extend the terms of the loans for one year. Interest of $69,079 and $6,635 was accrued as of May 31, 2020 and August 31, 2019, respectively.
From May 2019, BJDC entered into multiple short-term loan agreements with LCHD and borrowed from LCHD a total amount of $686,721 and $183,123 as of May 31, 2020 and August 31, 2019, respectively. The loans are secured by personal guarantees of certain of its shareholders, bear interest at 8% per annum, and are due on various dates through May 2020. Upon the expiration of these loans, LCHD has agreed to extend the terms of the loans for one year. Interest of $32,520 and $3,068 was accrued as of May 31, 2020 and August 31, 2019, respectively.
From June 2019, BJDC also entered into one-year loan agreements with Mr. Lin Yi-Hsiu, Chief Executive Officer of LCHD and borrowed $94,255 and $43,484 from him as of February 29, 2020 and August 31, 2019, respectively. On March 1, 2020, BJDC, Mr. Lin Yi-Hsiu and LCHD entered into a tripartite agreement that LCHD repaid all loans to Mr. Lin Yi-Hsiu on behalf of BDJC and got the rights of lender in succession. The loan is secured by personal guarantees of certain of its shareholders, bears interest at 8% per annum, and is due on various dates through February 2021. Interest of $4,676 and $762 was accrued as of May 31, 2020 and August 31, 2019, respectively.
5. RELATED PARTY BALANCES AND TRANSACTIONS
| As of May 31, | As of August 31, | |||||||
| 2020 | 2019 | |||||||
| Loan to Cheng Hung-Pin (a director and a shareholder) | $ | 33,322 | $ | 723 | ||||
| Due from shareholders: | ||||||||
| Cheng Hung-Pin | 8,505 | - | ||||||
| Huang Mei-Ying | 8,505 | - | ||||||
| Lo Shih-Chu | 8,505 | - | ||||||
| Chen Jun-Yuan | 8,505 | - | ||||||
| $ | 34,020 | $ | - | |||||
| Due to a shareholder: | ||||||||
| Tu Yu-Cheng | $ | (115,079 | ) | $ | (484,534 | ) | ||
| F-17 |
On March 10, 2020, LOC entered into a loan agreement with Cheng Hung-Pin and loaned him $33,322 (NT$1,000,000). The loan is unsecured, bears interest at a rate of 3% per annum and repayable on demand.
Amounts due from (to) shareholders and directors are unsecured, interest-free with no fixed payment term.
On September 2, 2019, the Company reached an agreement to repay the amount owed to Tu Yu-Cheng of $461,903 in the form of 908,678 restricted common shares of LCHD owned by the Company. As of May 31, 2020, the Company no longer owned any shares of LCHD.
On October 1, 2017, LOC leased an office in Tai Chung, Taiwan from Goodweber Network Holdings Co. which was held by the Company’s director - Cheng Hung-Pin. The monthly rental was $1,257 (NT$38,095). On April 1, 2019, LOC leased the same office from the Company’s shareholder - Tu Yu-Cheng. The monthly rental was $1,485 (NT$45,000) with a term of one year. On April 1, 2020, the Company renewed the lease for an additional one year term. During the nine months ended May 31, 2020 and 2019, the Company paid rental amounts of $13,362 and $8,779 that are included in general and administrative expenses respectively. During the three months ended May 31, 2020 and 2019, the Company paid rental amounts of $4,494 and $3,214 that are included in general and administrative expenses respectively.
During the nine months ended May 31, 2020 and 2019, Tu Yu-Cheng charged the Company a total of $nil and $76,339 respectively for technical support services provided by him. During the three months ended May 31, 2020 and 2019, Tu Yu-Cheng charged the Company a total of $nil and $25,344 respectively for technical support services provided by him.
6. INCOME TAXES
For the period ended May 31, 2020 and 2019, the local (United States) and foreign components of loss before income tax comprised of the following:
| Nine months ended May 31, | Three months ended May 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Tax jurisdictions from: | ||||||||||||||||
| - Local | $ | (323 | ) | $ | (660 | ) | $ | - | $ | (660 | ) | |||||
| - Foreign, representing | ||||||||||||||||
| Taiwan | (1,100,051 | ) | (190,752 | ) | (374,971 | ) | 203,780 | |||||||||
| PRC | (475,346 | ) | (56,957 | ) | (140,484 | ) | (34,884 | ) | ||||||||
| (Loss) Profit before income tax | $ | (1,575,720 | ) | $ | (248,369 | ) | $ | (515,455 | ) | $ | 168,236 | |||||
British Virgin Islands
The Company is tax exempted in the British Virgin Islands where it was incorporated.
Taiwan
LOC is subject to corporate income tax (“CIT”) in Taiwan. With effect from January 1, 2018, the CIT rate in Taiwan is 20%. However, for profit-seeking entities with less than NT$ 500,000 (approximately $16,000) in taxable income, the CIT rate is 18% in 2018, 19% in 2019, and 20% in 2020 if taxable income exceeds NT$120,000 (approximately $3,900).
BJDC is subject to corporate income tax (“CIT”) at 25% in accordance with the relevant tax laws and regulations of the PRC.
The components of the provision (benefit) for income taxes expenses are:
| Nine months ended May 31, | Three months ended May 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Current | $ | - | $ | 26 | $ | - | $ | 26 | ||||||||
| Deferred | - | - | - | - | ||||||||||||
| Total income tax expense | $ | - | $ | 26 | $ | - | $ | 26 | ||||||||
| F-18 |
The reconciliation of income taxes expenses (benefit) computed at the Taiwan statutory tax rate to income tax expense is as follows:
| Nine months ended May 31, | Three months ended May 31 | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Loss) profit before income taxes | $ | (1,575,720 | ) | $ | (248,369 | ) | $ | (515,455 | ) | $ | 168,236 | |||||
| Taiwan statutory income tax rate1 | 20 | % | 19 | % | 20 | % | 19 | % | ||||||||
| Income tax (credit) expense computed at statutory income rate | (315,144 | ) | (47,190 | ) | (103,091 | ) | 31,965 | |||||||||
| Reconciling items: | ||||||||||||||||
| Non-deductible expenses | 70,067 | 10,244 | 22,442 | 3,071 | ||||||||||||
| Tax effect of tax exempt entity | 65 | 125 | - | 125 | ||||||||||||
| Effect of Taiwan tax rate change | 15,398 | 2,485 | 4,795 | (1,682 | ) | |||||||||||
| Rate differential in different tax jurisdictions | (23,767 | ) | (2,848 | ) | (7,024 | ) | (1,744 | ) | ||||||||
| Valuation allowance on deferred tax assets | 253,381 | 37,210 | 82,878 | (31,709 | ) | |||||||||||
| Income tax expense | $ | - | $ | 26 | $ | - | $ | 26 | ||||||||
1 The Taiwan statutory income tax rate was used because the majority of the Company’s operations are based in Taiwan. The tax rate is adopted in accordance with Income Basic Tax Act.
Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of each major type of temporary difference:
| As of May 31, | As of August 31, | |||||||
| 2020 | 2019 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry-forwards | $ | 2,265,747 | $ | 726,151 | ||||
| Less: valuation allowance | (2,265,747 | ) | (726,151 | ) | ||||
| $ | - | $ | - | |||||
As of May 31, 2020 and August 31, 2019, LOC had net operating loss carry-forwards in Taiwan of $1,549,511 and $485,261, respectively, which will expire in various years through 2025.
As of May 31, 2020 and August 31, 2019, BJDC had net operating loss carry-forwards in the PRC of $716,236 and $240,890, respectively, which will expire in various years through 2027.
Valuation allowance was provided against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred tax assets will not be realized. The Company had deferred tax assets which consisted of tax loss carry-forwards and others, which can be carried forward to offset future taxable income. The management determines it is more likely than not that part of deferred tax assets could not be utilized, so allowance was provided as of May 31, 2020 and August 31, 2019. Movement of valuation allowance is as follow:
| As of May 31, | As of August 31, | |||||||
| 2020 | 2019 | |||||||
| Balance at September 1 | 726,151 | - | ||||||
| Additions | $ | 1,539,596 | $ | 726,151 | ||||
| Balance at end of the period / year | $ | 2,265,747 | $ | 726,151 | ||||
| F-19 |
7. COMMON STOCK
The share capital balance as of August 31, 2019 and May 31, 2020 represented the issued share capital of the Company.
Neither stock issuance was funded as of August 31, 2019 and May 31, 2020 and therefore are presented in the balance sheet as stock subscriptions receivable.
8. COMMITMENTS AND CONTINGENCIES
Leases
During the nine months ended May 31, 2020 and 2019, the Company entered into agreements with independent third parties and a shareholder to lease office premises in Taiwan and Beijing for the operations of the Company. Rental expense of these leases for the nine months ended May 31, 2020 and 2019 was $87,403 and $40,029, respectively. Rental expense of these leases for the three months ended May 31, 2020 and 2019 was $28,350 and $16,345, respectively.
The components of lease costs, lease term and discount rate with respect of leases with an initial term of more than 12 months are as follows:
| Nine months ended | ||||
| May 31, 2020 | ||||
| Operating lease cost – classified as general and administrative expenses | $ | 68,313 | ||
| Weighted Average Remaining Lease Term – Operating leases | 2.03 years | |||
| Weighted Average Discounting Rate– Operating leases | 6.23 | % | ||
The following is a schedule, by years, of maturities of lease liabilities as of May 31, 2020:
| Operating leases | ||||
| 2021 | $ | 68,477 | ||
| 2022 | 52,328 | |||
| 2023 | 13,082 | |||
| 2024 | - | |||
| 2025 | - | |||
| Thereafter | - | |||
| Total undiscounted cash flows | 133,887 | |||
| Less: imputed interest | (2,592 | ) | ||
| Present value of lease liabilities | $ | 131,295 | ||
As of May 31, 2020, the Company had future minimum lease payments for non-cancelable short-term operating leases of $10,497 payable to a shareholder.
Contingencies
The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of the severance payments if employees are terminated due to restructuring, termination as a result of a mutual agreement or termination as a result of the expiration of a fixed-term labor contract. The Company has estimated its possible severance payments of approximately $111,000 and $40,000 as of May 31, 2020 and August 31, 2019, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
| F-20 |
In Taiwan, an employer can terminate an employment contract with notice (or with pay in lieu of notice) and with severance pay only due to stoppage of business or a transfer of ownership, business losses or curtailment of business operations, suspension of operations due to a force majeure event, or alteration of the business nature, forcing a reduction in the number of employees, and those employees cannot be reassigned to other suitable positions, or the employee is incapable of performing the tasks assigned. The Company has estimated its possible severance payments of approximately $22,000 and $10,000 as of May 31, 2020 and August 31, 2019, respectively, which have not been reflected in its consolidated financial statements, because it is more likely than not that this will not be paid or incurred.
9. SUBSEQUENT EVENTS
From May 2019 through August, 2020, the Company entered into various short-term loan agreements with LCHD, and borrowed from LCHD additional amount totaled $841,971. The loans are unsecured, bear interest at 8% per annum, and are due on various dates through August 2021.
On August 17, 2020 (the “Closing Date”), LCHD, a Nevada corporation through its wholly-owned subsidiary JFB Internet Service Limited, a company incorporated and existing under the laws of Hong Kong (the “Buyer”), acquired all of the issued and outstanding capital stock (the “Acquisition”) of NPI pursuant to the terms and conditions of that a Stock Purchase Agreement, dated as of the Closing Date (the “Purchase Agreement”), among LCHD, the Buyer, NPI and the selling shareholders of NPI.
As a result of the Acquisition, LCHD now owns, indirectly through the Buyer, 100% of NPI.
The aggregate purchase price for the Acquisition was $4,850,000, less certain discounts, expenses and reductions for outstanding NPI debt owed to LCHD and/or its affiliates, resulting in a net purchase price of $3,506,042, payable in 8,415,111 shares of LCHD’s common stock to the Sellers in accordance with their respective pro rata percentage.
| F-21 |
Exhibit 99.3
NICE PRODUCTS INC.
Contents
| F-1 |
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In U.S. dollars except share and per share data)
The following unaudited pro forma combined balance sheet and statements of income are presented to give effect to the acquisition of Nice Products Inc. (“NPI”) by Leader Capital Holdings Corp. (“LCHD”)(the “Acquisition”). The pro forma information was prepared based on the historical financial statements and related notes of LCHD and NPI, as adjusted for the pro forma impact of applying the acquisition method of accounting in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). The pro forma adjustments are based upon available information and assumptions that LCHD believes are reasonable. The allocation of the purchase price of the NPI acquisition reflected in these unaudited pro forma combined financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The pro forma adjustments are therefore preliminary and have been prepared to illustrate the estimated effect of the acquisition.
The unaudited pro forma combined balance sheet has been prepared to reflect the Acquisition as if the Acquisition had occurred on May 31, 2020. The unaudited pro forma combined statements of income combine the results of operations of LCHD and NPI for the nine months ended May 31, 2020 and for the year ended August 31, 2019, respectively, as if the transaction had occurred on September 1, 2019 and 2018, respectively.
The unaudited pro forma combined financial statements were prepared using the acquisition method of accounting with LCHD treated as the acquiring entity. Accordingly, the aggregate value of the consideration paid by LCHD to complete the acquisition was allocated to the assets acquired and liabilities assumed from NPI based upon their estimated fair values on the closing date of the acquisition. LCHD has not completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from NPI and the related allocations of purchase price, nor has LCHD identified all adjustments necessary to conform NPI’s accounting policies to LCHD’s accounting policies. Additionally, a final determination of the fair value of assets acquired and liabilities assumed from NPI will be based on the actual net tangible and intangible assets and liabilities of NPI that existed as of the closing date. Accordingly, the pro forma purchase price adjustments presented herein are preliminary, and may not reflect any final purchase price adjustments made. LCHD estimated the fair value of NPI’s assets and liabilities based on discussions with NPI’s management, due diligence and preliminary work performed by third-party valuation specialists. As the final valuations are being performed, increases or decreases in the fair value of relevant balance sheet amounts will result in adjustments, which may result in material differences from the information presented herein.
The unaudited pro forma condensed combined financial statements should be read in conjunction with LCHD’s historical consolidated financial statements and related notes included in its Quarterly Report on Form 10-Q for the nine months ended May 31, 2020 and Annual Report on Form 10-K for the fiscal year ended August 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on July 15, 2020 and November 29, 2019 respectively.
Transactions between the Company and NPI during the periods presented in the Pro Forma Financial Statements have been eliminated. LCHD expects to incur costs and realize benefits associated with integrating the operations of LCHD and NPI. The unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies. The unaudited pro forma condensed combined statement of operations does not reflect any non-recurring charges directly related to the acquisition that the combined company may incur upon completion of the transaction.
| F-2 |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF MAY 31, 2020
(In U.S. dollars)
| Historical (Note 1) | ||||||||||||||||||||
| LCHD | NPI | Pro
Forma adjustments |
Note | Pro Forma | ||||||||||||||||
| CURRENT ASSETS | ||||||||||||||||||||
| Cash and cash equivalents | $ | 163,558 | $ | 27,023 | $ | 190,581 | ||||||||||||||
| Prepayments, deposits and other receivables | 1,199,417 | 128,977 | (96,917 | ) | (3) | 1,231,477 | ||||||||||||||
| Notes receivable | 2,162,895 | - | (2,162,895 | ) | (3) | - | ||||||||||||||
| Due from a NPI’s director | - | 33,322 | 33,322 | |||||||||||||||||
| Due from NPI’s shareholders | - | 34,020 | 34,020 | |||||||||||||||||
| Tax recoverable | - | 2,776 | 2,776 | |||||||||||||||||
| Total current assets | 3,525,870 | 226,118 | 1,492,176 | |||||||||||||||||
| Intangible assets | - | - | 818,200 | (4) | 818,200 | |||||||||||||||
| Goodwill | - | - | 3,133,557 | (5) | 3,133,557 | |||||||||||||||
| Plant and equipment, net | 5,647 | 25,442 | 31,089 | |||||||||||||||||
| Operating lease right-of-use assets, net | - | 131,157 | 131,157 | |||||||||||||||||
| TOTAL ASSETS | $ | 3,531,517 | $ | 382,717 | $ | 5,606,179 | ||||||||||||||
| F-3 |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (CONT’D)
AS OF MAY 31, 2020
(In U.S. dollars)
| Historical (Note 1) | ||||||||||||||||||||
| LCHD | NPI | Pro Forma adjustments |
Note | Pro Forma | ||||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||||||||
| Accrued expenses and other payables | $ | 99,551 | $ | 240,424 | (101,600 | ) | (3) | $ | 238,375 | |||||||||||
| Contract liabilities | - | 16,057 | 16,057 | |||||||||||||||||
| Loans payable | - | 2,178,001 | (2,174,093 | ) | (3) | 3,908 | ||||||||||||||
| Due to a shareholder | - | 115,079 | 115,079 | |||||||||||||||||
| Due to a director | 1,320,414 | - | 1,320,414 | |||||||||||||||||
| Operating lease liability, current | - | 66,570 | 66,570 | |||||||||||||||||
| Total current liabilities | 1,419,965 | 2,616,131 | 1,760,403 | |||||||||||||||||
| NON-CURRENT LIABILITES | ||||||||||||||||||||
| Deferred tax liabilities | - | - | 163,640 | (6) | 163,640 | |||||||||||||||
| Bonds payable | 600,000 | - | 600,000 | |||||||||||||||||
| Convertible notes payable to related parties | 230,000 | - | 230,000 | |||||||||||||||||
| Operating lease liability, non-current | - | 64,725 | 64,725 | |||||||||||||||||
| Total liabilities | $ | 2,249,965 | $ | 2,680,856 | $ | 2,818,768 | ||||||||||||||
| SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||||||
| Common stock | 11,369 | - | 842 | (1) | 12,211 | |||||||||||||||
| Issued share capital | - | 3,500,000 | (3,500,000 | ) | (2) | - | ||||||||||||||
| Subscriptions receivable | - | (3,500,000 | ) | 3,500,000 | (2) | - | ||||||||||||||
| Additional paid-in-capital | 6,418,073 | 211,194 | 3,470,184 | (1) | 7,907,209 | |||||||||||||||
| (211,194) | (2) | |||||||||||||||||||
| (1,981,048 | ) | (1) | ||||||||||||||||||
| Accumulated other comprehensive (loss) income | - | (9,145 | ) | 21,808 | (2) | 12,663 | ||||||||||||||
| Accumulated deficit | (5,147,890 | ) | (2,500,188 | ) | 2,503,406 | (2) | (5,144,672 | ) | ||||||||||||
| TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) | 1,281,552 | (2,298,139 | ) | 2,787,411 | ||||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | $ | 3,531,517 | $ | 382,717 | $ | 5,606,179 | ||||||||||||||
| F-4 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31, 2020
(In U.S. dollars except share and per share data)
| Historical | ||||||||||||||||||||
| LCHD | NPI | Pro Forma adjustments |
Note | Pro Forma | ||||||||||||||||
| REVENUE | $ | 5,000 | $ | 18,659 | $ | 23,659 | ||||||||||||||
| Cost of revenue | - | (306 | ) | (76,706 | ) | (7) | (77,012 | ) | ||||||||||||
| Sales and marketing expenses | - | (214,956 | ) | (214,956 | ) | |||||||||||||||
| General and administrative expenses | (3,700,182 | ) | (1,313,540 | ) | (5,013,722 | ) | ||||||||||||||
| Total operating expenses | (3,700,182 | ) | (1,528,802 | ) | (5,305,690 | ) | ||||||||||||||
| LOSS FROM OPERATIONS | (3,695,182 | ) | (1,510,143 | ) | (5,282,031 | ) | ||||||||||||||
| Interest expenses | (47,303 | ) | (99,815 | ) | 90,734 |
(3) | (56,384 | ) | ||||||||||||
| Other income | 89,591 | 34,238 | (87,517 |
) | (3) | 36,312 | ||||||||||||||
| LOSS BEFORE INCOME TAXES | (3,652,894 | ) | (1,575,720 | ) | (5,261,959 | ) | ||||||||||||||
| INCOME TAX | (30,250 | ) | - | 15,341 | (8) | (14,909 | ) | |||||||||||||
| NET LOSS | $ | (3,683,144 | ) | $ | (1,575,720 | ) | $ | (5,276,868 | ) | |||||||||||
| LOSS PER SHARE | ||||||||||||||||||||
| Basic and Diluted | $ | (0.03 | ) | $ | (0.04 | ) | ||||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||||||
| Basic and Diluted | 113,700,043 | 8,415,111 | (1) | 122,115,154 | ||||||||||||||||
| F-5 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2019
(In U.S. dollars except share and per share data)
| Historical | ||||||||||||||||||||
| LCHD | NPI | Pro
Forma adjustments |
Note | Pro Forma | ||||||||||||||||
| REVENUE | $ | 18,111 | 516,304 | $ | (430,589 | ) | (3) | $ | 103,826 | |||||||||||
| Cost of revenue | - | (25,249 | ) | (102,275) | (7) | (127,524 | ) | |||||||||||||
| Sales and marketing expenses | - | (118,511 | ) | (118,511 | ) | |||||||||||||||
| General and administrative expenses | (955,569 | ) | (1,106,841 | ) | 430,589 | (3) | (1,631,821 | ) | ||||||||||||
| Total operating expenses | (955,569 | ) | (1,250,601 | ) | (1,877,856 | ) | ||||||||||||||
| LOSS FROM OPERATIONS | (937,458 | ) | (734,297 | ) | (1,774,030 | ) | ||||||||||||||
| Interest expenses | (2,795 |
) | (21,883 | ) | 9,913 |
(14,765 | ) | |||||||||||||
| Other income | 38,159 | 13,137 | (9,400 |
) | 41,896 | |||||||||||||||
| LOSS BEFORE INCOME TAXES | (902,094 | ) | (743,043 | ) | (1,746,899 | ) | ||||||||||||||
| INCOME TAX (EXPENSE) CREDIT | - | (26 | ) | 19,432 | (8) | 19,406 | ||||||||||||||
| NET LOSS | $ | (902,094 | ) | $ | (743,069 | ) | $ | (1,727,493 | ) | |||||||||||
| LOSS PER SHARE | ||||||||||||||||||||
| Basic and Diluted | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||||||
| Basic and Diluted | 104,850,604 | 8,415,111 | 113,265,715 | |||||||||||||||||
| F-6 |
LEADER CAPITAL HOLDINGS CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Transaction
On August 17, 2020, the Company, through its wholly-owned subsidiary JFB Internet Service Limited, acquired all of the issued and outstanding capital stock (the “Acquisition”) of NPI. The aggregate purchase price for the acquisition was $4,850,000, less certain discounts, expenses and reductions for outstanding NPI debt owed to the Company and/or its affiliates, resulting in a net purchase price of $3,506,042 payable in 8,415,111 shares of the Company’s common stock to NPI in accordance with their respective pro rata percentage.
Note 2 - Basis of Presentation
The unaudited pro forma condensed combined financial statements (the “Pro Forma Financial Statements”) are based on LCHD’s and NPI’s historical consolidated financial statements as adjusted to give effect to the Acquisition. For purposes of the Pro Forma Financial Statements, the Company has (i) assumed that the carrying value of all assets and liabilities other than the intangible assets and goodwill identified upon acquisition approximated their respective acquisition date fair values, (ii) has performed a preliminary valuation of NPI’s identifiable assets as of May 31, 2020 and (iii) has computed the value of goodwill based on the total preliminary purchase price, after deducting the assets and liabilities identified in (i) and (ii).
The unaudited pro forma combined balance sheet has been prepared to reflect the Acquisition as if the Acquisition had occurred on May 31, 2020. The unaudited pro forma combined statements of income combine the results of operations of LCHD and NPI for the nine months ended May 31, 2020 and for the year ended August 31, 2019, respectively, as if the transaction had occurred on September 1, 2019 and 2018, respectively.
Note 3 - Pro Forma Adjustments
The following pro forma adjustments are included in the unaudited pro forma condensed combined balance sheet as of May 31, 2020 and the unaudited pro forma condensed consolidated statements of operations for the nine months ended May 31, 2020 and the year ended August 31, 2019:
| (1) | To reflect the issuance of 8,415,111 shares of LCHD’s common stocks to the shareholders of NPI, valued at $3,471,026 resulting in 129,974,219 total shares of common stock outstanding of LCHD after the acquisition, and the offset of outstanding NPI debt owed to the Company of $1,981,048. |
| (2) | To eliminate NPI’s historical equity balance which includes additional paid in capital, accumulated deficits and accumulated other comprehensive income.
|
| (3) | To eliminate intercompany balances and transactions between NPI and LCHD. |
| (4) | To reflect the adjustments to record the identifiable intangible assets acquired in the Acquisition at their estimated fair value of $0.8 million based on a preliminary valuation. The preliminary estimates of the fair values of the intangible assets acquired relate to the acquisition of trade name, active user and technology. The estimated useful life of the intangible assets was 8 years. |
| (5) | To reflect the preliminary estimate of goodwill, which represents the excess of the purchase price over the fair value of NPI’s identifiable assets acquired and liabilities assumed. Upon final completion of the fair value assessment, the ultimate purchase price may differ from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be allocated to goodwill. |
| (6) | To record the deferred tax liability for the temporary tax differences attributable to the acquired intangible assets of NPI. |
| (7) | Represents additional intangible asset amortization expenses related to the acquired intangible assets recorded at their preliminary fair value as if the Acquisition had occurred on September 1, 2017. |
| (8) | Reflects the income tax effect on pro forma adjustments of the Acquisition based on the estimated combined statutory tax rate of 20% for the nine months ended May 31, 2020 and 19% for the year ended August 31, 2019. |
| F-7 |